The Benefits Trap

The sharp rise in food-stamp beneficiaries predated the financial crisis of 2008: From 2000 to 2007, the number of beneficiaries rose from 17.1 million to 26.3 million, according to the Department of Agriculture. That number has leaped to 47.5 million in October 2012. The average benefit per person jumped in 2009 from $102 to $125 per month.

Compare 2010 with October 2012, the last month for which food-stamp data have been reported. The unemployment rate fell to 7.8% from 9.6%, and real GDP was rising steadily if not vigorously. Food-stamp usage should have peaked and probably even begun to decline. Yet the number of recipients rose by 7,223,000. In a period of falling unemployment and rising output, the number of food-stamp recipients grew nearly 10,000 a day. Congress should find out why.

Barely three million Americans received work-related disability checks from Social Security in 1990, a number that had changed only modestly in the preceding decade or two. Since then, the number of people drawing disability checks has soared, passing five million by 2000, 6.5 million by 2005, and rising to nearly 8.6 million today. In a series of papers, David Autor of MIT has shown that the disability program is ineffective, inefficient, and growing at an unsustainable rate. And news media have reported cases of rampant fraud.

In 2000, fewer than 3.9 million young men and women received Pell Grant awards to attend college. The number rose one-third, to 5.2 million by 2005, and increased a million more by 2008. In the next three years, however, the number grew over 50%, to an estimated 9.7 million. That is nearly six million more than a decade earlier. The result is fewer people in the work force. Meanwhile the mismatch grows between the number of college graduates and the jobs that require a college education.

Taxes are part of the story too: Today’s higher marginal tax rates on work-related income could well lead to further reductions in work effort by those taxed, as well as to slower economic growth.

HKO

A mousetrap is baited with free cheese.

The loss of benefits resulting from moving from incentivized dependency to earned income is an effective marginal tax rate as high as 100%. With such a structure government programs become a trap. We must remove the ballooning incentives not to hire first and then the incentives not to work.